Monday, May 10, 2010

Central Bank Bond Buying Starts

Euro-area central banks said they are buying government bonds as part of a program to counter a sovereign debt crisis and defend their common currency.

“We confirm that we are buying today,” said a spokesman for Germany’s Bundesbank in Frankfurt. The Bank of France and Bank of Italy also said they have started purchasing government bonds. The European Central Bank, which announced the unprecedented initiative at 3:15 a.m. this morning, declined to comment.

Until the junk sovereign bonds are mostly off the banks' balance sheets everyone will still be afraid to lend to banks. They are recapitalizing the banks. Obviously, this means that no one believes that the other measures will eventually work, i.e., it seems unlikely that bond issuance for debt-loaded countries will be extremely impaired.

Tomorrow I will post on the SPV and the issues there. I had a whole bunch of links prepared for what I thought was going to be a Triumph of the Nerd post, but now the different FAS and IAS accounting standards abruptly acquire a wider significance.

I have some preliminary thoughts about the long-term impact of this. The first one is that we won't know the short-term effect until we know how much of the bonds have actually been moved off bank balance sheets.

I will reserve my long-term thoughts until tomorrow; I am going to sit and mull this over a bit and maybe scrub some toilets to ensure that I am in the properly humble spirit.

However, I will come out and say that the three-year postponement appears to be an attempt to hide the fundamental imbalance until the US is in worse shape than it now is. This whole thing is a dodge, and because it is a dodge, and because everyone seems to realize that it is a dodge, confidence in European banks won't be restored until those bad bonds are unloaded.

Poor Germany.Germany just got handed a very large bill. List of countries by public debt (use the CIA 09) Germany was very upset about the projected 80 billion Euro in borrowings for 2010; it just probably picked up another 40 billion of long term debt. At least, but who knows what happens in three years? They could be in the bag for much more - it depends on how much debt must eventually be written off.

The April edition of the Bundesbank's monthly report (English, a mere 130 page pdf) contained a review of Germany's debt position, some of which is below:Here is an excerpt from the report discussing the projected rise to 82% of GDP in 2013:

This figure was calculated under the assumption of both relatively strong economic growth and the implementationof steps towards consolidation, even though no measures for achieving the latter were cited. In addition, the effects ofthe further tax cut envisaged in the central government’s coalition agreement and the establishment of new debt relief entities for banks were not factored into the calculation.Consequently, substantial risks remain in this area.

[in other words, "We'll believe it when we see it, you dopes!"]

Bundesbank is probably suffering a collective depression this morning.

They projected a slight drop in German GDP for Q1, followed a resumption in integral, sustained growth later in 2010, followed by a gradual reduction in the state and local funding problems caused by the drop in tax receipts.

Btw, every US citizen should read the "Dynamics of Debt Growth" section of this report beginning on page 18. It's short, it's easy to comprehend, and it is quite applicable to the US. You take trend growth (in the US, now really in the 2% range at best), figure your interest margin, and then from there you can figure out what level you need to stabilize your public debt. Since trend growth in Germany is now hanging around 1%, they grimly observe that they need to be running surpluses.